[Click eStock] "Naver's Stock Slump, Watch for the Slowdown in Cost Increase Timing"

Profit Margin Decline Due to Rising Labor and Marketing Costs
Sales Growth Remains Strong...Need to Watch for Cost Slowdown Timing
Normalization Expected from 2022...Attention Needed from Second Half of This Year

[Asia Economy Reporter Minwoo Lee] Since last month, NAVER's stock price has been relatively weaker compared to Kakao. This is attributed to a slowdown in profit growth rate due to increased expenses. Given that the sales growth rate remains solid, there is an analysis suggesting the need to pay attention from the second half of this year, ahead of 2022 when the expense growth is expected to ease.

On the 27th, Korea Investment & Securities maintained its 'Buy' rating and target price of 540,000 KRW for NAVER, citing these reasons. The closing price the previous day was 363,000 KRW. Since last month, NAVER's stock price has continued to underperform. Compared to the beginning of the year, Kakao rose by 49.6%, while NAVER increased by only 21.5%. Both companies share common factors such as accelerated digital transformation due to COVID-19 and growth in core new businesses like webtoons and fintech (finance + technology), so there is a need to analyze the reasons for NAVER's underperformance.

Korea Investment & Securities pointed to a slowdown in profit growth rate due to increased expenses as the background for NAVER's stock price weakness. From the second half of last year, NAVER's operating expenses began to rise rapidly. Partner costs linked to sales also steadily increased, but recently, increases in development/operation costs related to labor and marketing expenses have become more prominent.

In 2020, NAVER's development/operation costs increased by 16.3% year-on-year to about 1.2 trillion KRW, but this year, due to salary raises and increased stock compensation costs, it is expected to reach 1.5 trillion KRW, a 29.5% increase from the previous year. Marketing expenses rose by 52.5% year-on-year to 545.9 billion KRW last year, driven by increased Pay point reserves and marketing for the webtoon new business. This year, it is expected to increase by 40.7% to 767.8 billion KRW.

However, the sales growth rate remains solid. NAVER's sales increased by 21.8% year-on-year last year. This year, sales are estimated to grow by 24.6% compared to last year. The proportion of high-growth business unit sales excluding advertising is expected to rise to 51.8% this year, up from 39.1% in 2019. It is analyzed that the operating profit growth rate will normalize once the increase in operating expenses slows down.

The slowdown in expense growth is expected to occur next year. Researcher Hoyoon Jung of Korea Investment & Securities stated, "From 2022, stock compensation costs will gradually decrease, and salary increases will also be at a normal level, leading to a decline in the growth rate of development/operation costs." He added, "Assuming that aggressive investment in webtoons for marketing will be completed within this year, the growth rate of marketing expenses is likely to slow down from next year." Therefore, since NAVER's profit growth is expected to be reappraised from 2022, attention should be paid starting from the second half of this year.

This content was produced with the assistance of AI translation services.